'Pre-mature capital account convertibility can harm economy'

Reserve Bank of India (RBI) Governor D Subbarao has said that India will "gradually" move towards capital account convertibility only after preconditions like fiscal consolidation are met.

"There is no evidence (the world over) that capital account convertibility, regardless of macroeconomic circumstances, has been a positive force," he said at a panel discussion on India's economic reforms and development here last evening.

On the contrary, evidence suggests that premature capital account liberalisation can create macroeconomic imbalances with huge costs to growth and welfare, he said.

"All the historical evidence shows that pre-mature capital account liberalisation can turn you into a 'high beta' economy," he said explaining that high beta economy is vulnerable to volatile external cycles, sharp fluctuations in exchange rates and asset price build-up and bubbles.

Capital Account Convertibility (CAC) -- or a floating exchange rate -- means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. This means that capital account convertibility allows anyone to freely move from local currency into foreign currency and back.

"We are committed to opening up the capital account gradually along a road map, with the road map itself getting recalibrated on a dynamic basis," the Governor said. "We need to balance the needs of the macro economy with the compulsions of macroeconomic and financial stability."

Preconditions for CAC are "fiscal consolidation, financial sector should be more resilient, increase our export competitiveness and imposts should be more price elastic, and more liberal FDI policy with less bureaucratic interface and became a more friendly investment destination", he said.